Japan’s recovery started with a dream, among politicians and business leaders. In their imagination, Japan would rise from the ashes – actual, real-life ashes – and become again a great and prosperous nation.

This clear vision quickly led to a plan of action. The situation in 1949, of hyperinflation and crushing taxes, was plainly not in accordance with the goal of a prosperous Japan, so the leaders set about fixing the problem.

They had virtually no resources to do so. The economy consisted mostly of black-market subsistence, tax revenues were negligible, and issuing debt was impossible. Since tax revenue was far less than the government’s needs, the government subsisted mostly by printing money, with the usual consequences.

One of the first things they did was to make government debt issuance illegal. It remained so until 1965. Then they refused any more economic aid.

In 1949, they pegged the yen to gold, immediately ending the hyperinflation.

Then, they eliminated the consumption tax (national sales tax).

Japanese gold coins from the 1850s

In 1950, the income tax schedule was revised. The top rate fell to 55% from 85%. But more importantly, the income at which that rate (and others) applied was raised dramatically. This rate originally applied to income of 500,000 yen. By 1957, the 55% tax bracket applied to income of 10 million yen, twenty times higher.

In 1951, interest and dividend income were taxed at a separate, lower rate. In 1953, capital gains were exempted from taxation completely. Interest income was taxed at only 10 percent. Businesses received a truckload of favorable treatments, in the form of accelerated depreciation, deductions, and exemptions. In 1955, interest income was made tax-free.

Throughout the 1950s and 1960s, the government had a specific goal: to keep tax revenues, and the size of the government, below 20% of GDP. They reasoned that this would be best for the brisk growth of the private sector. It worked.

The Japanese people, as we know, became wealthy in those years. Wealthy people are able to pay more in taxes than poor people. Between 1950 and 1970, tax revenues of the central government increased by sixteen times, all in non-inflationary gold-linked yen.

As the country became wealthier, and GDP grew, then the services that the government could provide on a budget of 20% of GDP grew as well. Welfare and national healthcare plans were added. Dirt roads were paved. Sewage systems were built. There was no conflict between government services and the private sector. Both became prosperous together.

3 comments:

What I don't understand is why Japan does not abandon its crazy inheritance tax. Countries like Sweden has abandoned it. Why should the country benefit when you die, if you own property, and want someone to inherit it according to your will?

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In Japan for 29 years... Currently founder and owner of Universal Vision Ltd. and Co-Founder of Smart Research. I have four children and I just love Japan. I also write for LewRockwell.com. Here are my archives:
http://www.lewrockwell.com/rogers/rogers-arch.html